Fixed-Income ETFs Expected to Gain Traction

At the beginning of this year, Barclays Global Advisors was the only investment management company with a bond exchange-traded fund. Today, however, there are nearly two dozen fixed-income ETFs from the likes of State Street Global Advisors and Vanguard, with more on the way from Bear Stearns and Ameristock.

"The income space is ripe for ETF innovation," P. Michael Jones, chief investment officer at Wachovia Securities, told the Financial Times. "And it's not just narrowed down to bonds. To the extent that we can create income-oriented solutions that are lower cost, they will take off like a rocket."

With the market now flooded with niche equity ETFs, firms are now looking to fixed income for fresh ideas. Scott Ebner, senior vice president of the American Stock Exchange's ETF Marketplace, said bond products are a ripe opportunity for ETF providers.

As to why bond ETFs are so late to the table, one reason, certainly, is that the SEC exemptive relief process can take up to several years. A second is the sheer complexity of bond ETFs; due to maturing bonds, holdings must continually be replaced.

Nonetheless, with Bear Stearns and Ameristock coming to the marketplace this year, Anthony Rochte, senior managing director of State Street, believes that will prompt the SEC to speed up its approval process and competitors to come out with innovative products. "The core building blocks of fixed income are now in place," Rochte said.